copper inventory @ lme

Good Morning, This was written last week and now the the copper inventory is sitting at 201,975 MT (26/03/04). It is interesting news that Codelco could have sold their reserves already. It does look like we're heading for a squeeze in the future weeks.

By Andrea Hotter London, March 18 (OsterDowJones) - Improving copper demand and the subsequent exchange inventory drawdowns could leave stocks at chronic levels in the course of the next few months and will underpin prices in the process, market players said Thursday. The 180,000 metric tons decline in total reported London Metal Exchange stocks in February was the largest monthly fall since June 2000, with copper moving further into deficit as the pace of the drawdowns continues to accelerate. At the same time, cancelled warrants, which represent material expected to be remove from LME warehouses, have dramatically increased this year, indicating further large stock declines are to follow. Strong underlying demand has fed the decline, market players said, given that LME inventories are widely seen as a market of last resort to feed any deficits. Copper remains the star performer in terms of LME stock drawdowns with levels falling 6,000 tons to 229,050 tons Thursday. Given that cancelled warrants were 91,800 tons Wednesday, this implies that only around 143,250 tons are effectively available to the market and increasing the potential for a rapid depletion of exchange inventories. Only 30,475 tons of this remaining amount - or 18,575 tons after cancelled warrants - is located outside the U.S. "At this rate of decline, 3,000-4,000 tons a day, we could be theoretically be at zero stocks on LME by the end of June," said analyst Ed Meir of Man Financial. "We expect the $3,000/ton level to eventually be taken out, as stocks continue to erode," he added. Amid this backdrop, the latest International Copper Study Group data shows that the refined copper market was in a production deficit of 312,000 tons in 2003, compared with a production surplus of 197,000 tons in 2002. Given the growing market deficit and higher copper prices, industry players believe that producers who initiated a series of cutbacks - including U.K.-listed Rio Tinto PLC, U.S. producer Asarco Inc and Canada's Noranda Inc - may restart some of their idled capacity. This comes after the announced restart of 110,000 tons of idled capacity by U.S. producer Phelps Dodge, as well as the start of the sale of Codelco's 200,000 tons stockpile. According to a source familiar with Codelco, the Chilean producer may have already sold most of the 200,000-ton stocks in both spot tenders and other channels like private negotiations. Availability of physical metal is now extremely tight, and with demand expected to continue to strengthen over the next few months a scramble for scarce metal is a real possibility, according to Jim Lennon of Macquarie Bank. "At the same time, there is anecdotal evidence that non-reported stocks are declining, with the notable exception of aluminum," Lennon said. "Moreover, it is likely that a significant proportion of non-reported metal has already found its way to the LME, attracted by rising prices," he added. The market tightness has triggered short covering in the cash to three-months spread, which traded out Wednesday to a backwardation of $122/ton, an eight-year high, before hovering currently around $100/ton. Three-month copper was pushed to a high of $3,002/ton Thursday before the market was capped by the weight of increased lending and renewed dollar strength. "Interestingly, Shanghai copper prices have struggled in recent days amid selling by the Strategic Reserve Bureau, or SRB," said analyst Martin Fewings of Mitsui Bussan Commodities Limited. "In fact, the nearby Shanghai copper contract is now some $265/ton cheaper than cash LME (including VAT and duty of 17.5% and 2% respectively," he added. "Unsurprisingly, there are reports of very unhappy locals trying to escape their LME contracts," Fewings said. "But this situation is unlikely to last for long. Once the SRB stops selling, the differential should narrow," he added. However, Fewings said that in the event that this situation lingers for longer, the strain on LME copper stocks may lessen. "Indeed, if the differential persists, cancelled material destined for China may even end up being re-warranted," he added. Three-month copper had closed the LME PM kerb Wednesday at $2,939/ton (bid).